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New bond payments expected to average $1.3 million per year

(Sept. 20, 2013) Bonds, debt, bonded indebtedness and the ever-ominous “unfunded liabilities” remain a frequent topic of debate in City Hall as the town prepares its final statements on the recently wrapped 2013 fiscal year and prepares for a $12.3 million bond issuance.

The City Council passed the first reading of the ordinance this week authorizing the bond sale, which will likely occur at the end of the calendar year given the more competitive interest rates offered.

That issue will incur an estimated $1.3 million in average annual debt service. However, as a net of what the city pays in bond service overall, future payments are actually projected to decrease as the town retires older debts.

“Remember that what we established on the capital improvement is zero-sum,” City Manager David Recor told the council. “Any expenses you remove, which you have, will reduce what we pay overall.”

The city estimates that $223,500 of the new debt service will be paid from the town’s general fund, which is balanced mostly by tax revenues. This borrowing will support projects like the construction of a new Ocean City Beach Patrol Headquarters.

Another $43,300 per year will pay back money borrowed for sewage system improvements. This will be paid out of the Wastewater Department, which is run as a separate enterprise supported by its own user fees and operates largely in isolation.

The lion’s share of the new debt burden, an estimated $1.1 million annually, will be paid out of the city’s food tax to finance the performing arts theater expansion at the convention center. This debt will be paid out over 10 years, as opposed to a 20-year amortization for the general fund and wastewater projects

Although some promoters and hoteliers have questioned the project’s ability to attract new business relative to its price tag, the performing arts facility is somewhat of a ‘use it or lose it’ scenario. The state authorizes a half-percent food tax, to be collected for the city, to pay for capital improvements at the convention center.

This agreement was reached when the state first entered into a partnership with the city to finance the construction of the municipal center. Last year, the state signed another 20-year agreement with the city to continue the partnership and improve the facility.

“We get the whole of the food tax, but the deal is we have to use it for the retirement of the convention center debt exclusively,” city Budget Manager Jennie Knapp said, “which is why it’s a good idea to do whatever expansion we’re going to do now while the food tax is still in existence.”

The city’s food tax was previously at a full 1 percent, but was cut in half when the state realized that the town was bringing in more than needed to cover its share of the debt. The portion of the performing arts center’s cost allotted to the town, $8.3 million, is exactly what the state predicts the town’s food tax will bring in over the next ten years, allowing for interest paid on the debt over that period as well. The state will finance the remaining $5.6 million of the theater’s $14 million price.

However, local landlord and fiscal activist Tony Christ has been pressing the city to completely refinance all of its outstanding debt to a lower interest rate. But this is not so simple, city Finance Administrator Martha Bennett said this week.

“We have refunded all the debt we legally can,” Bennett said. “We have bonds that, by their ordinance, can’t be refunded for ten years. The last bond you issued can’t be refunded until 2020.”

When bonds are refinanced, the borrower is essentially paying off their debts early using money they borrowed from somewhere else at a lower interest rate, incurring less total loss on the borrower. However, many bonds have “call dates” attached to them, which mandate that the bond cannot be paid off before a certain time period. This guarantees the lender that they will receive the given interest rate for a minimum period of time.

To be attractive to investors, most municipal bonds are paid back over 20 years with a 10-year “call” guaranteed.

“If you already refinanced them, you can’t refinance them again,” Bennett said. “The ones that we haven’t refinanced are already at a pretty low interest rate, but they can’t be refinanced earlier than ten years because of the call.”

Christ has also pressed the city to work with him on creating a simplified ledger sheet that will, he said, more accurately reflect the city’s tangible assets and future liabilities than does its Comprehensive Annual Financial Report, the 2013 edition of which is being prepared.

“I’d like to get us away from the CAFR and towards something that’s real and that you can all understand,” Christ said. “What I’d like to go for is a simple, two-sheet list of your assets and your liabilities.”

While the CAFR serves as a book-entry accounting summary of the city’s year, it only reflects transactions that have already occurred, not future burdens.

“What Mr. Christ is suggesting is that the CAFR does not include all of the city’s unfunded liabilities, such as all of the street work and the storm drain improvements,” City Manager David Recor said.

“If I didn’t think there was value to the exercise Mr. Christ is proposing, I wouldn’t commit to work with him on the project,” Recor said.

“However, what I won’t allow is a spin or the interpretation of the data to tell a story,” Recor said, in reference to Christ’s often antagonistic stance towards City Hall.

Regardless of the political implications, the city will be partially forced to move in Christ’s direction next year with the introduction of new pension rules from the Government Accounting Standards Board.

Those mandates will require the town to disclose the deficit between the estimated value of future benefits for its employee base and the assets of its pension trust funds.

Although the city’s pension funds are well-financed relative to other municipalities, city leaders have already said they fear that the addition of an estimated $50 million in future liabilities to the city’s balance sheet will send the wrong message to the public.

 

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